Dead Debt: Sometimes Banks Are (Gasp!) Right

Remember the kid who spent the first month of school doing everything possible to antagonize the teacher? After that, he couldn't win -- no matter how early he turned in his homework, how willing he was to do extra credit, how reasonable he was in classroom discussions. Well, banks are the corporate equivalent of that kid.

At the risk of sounding anything but politically correct, I'm going to go out on the ledge here. But banks aren't always the bad guys, and attacking them for every business move they make is hardly in the best interest of their shareholders.

Before you gasp, let me restate the obvious: Just because banks nearly brought our economy to the brink of collapse doesn't mean we should challenge everything they do.

I was thinking about that last night after reading yet another pro-consumer, anti-bank press release. This one, from a California organization called Credit Card Assist, argues that it's not only "morally reprehensible, but it's against the law" for bankers to turn to family members for repayment of debts owed by recently deceased loved ones.

In fairness, the press release specifically states, "harass family members for the debt owed," which I agree is over the line. But there is a difference between violating the provisions of the federal Fair Debt Collection Act -- which spells out when, where, and how often debt collectors can call and sets specific rules for their behavior -- and simply trying to collect outstanding account balances.

Asking people to pay what they owe -- or asking their survivors in the case of a debtor's death -- isn't personal. It's just business, a practice that helps maintain profits and protect shareholder value. And while I frequently advocate on behalf of consumers -- when the evidence shows they are victims of fraud, scams, or questionable practices -- it's naïve to suggest those consumers are always right.

Sometimes consumers are wrong -- and sometimes consumers try to twist facts and circumvent laws to their own advantage.

Here's the bottom line: I feel particularly passionate about this issue because it underscores how we view debt -- and helps explain how we got into this global debt disaster. Why do so many people seem to feel they don't have to worry about money someone else spent, whether it was a deceased relative or a former Presidential administration?

So back to the point about the press release... Credit Card Assist is trying to villify banks, especially their credit card services divisions, for "illegally pursu[ing] widows and grieving family members for the debts of deceased loved ones - debts that they don't even owe." In the press release, Credit Card Assist CEO Bill Hazelton writes:

Whoa. I realize this organization is based in the Republic of California, so perhaps Hazelton is citing state specific regulations or practices. I'm not an expert on California law.

But I can assure you that your "debts are not forgiven by the state" when you die anywhere else in the nation. How convenient would that be if it were true? Anyone diagnosed with a terminal illness could run up massive credit card balances, take out loans, and basically spend his final days spending irrationally and compulsively for relatives, friends -- heck, even strangers. And he could die with the understanding that no one would be held responsible for the spending spree.

Screw the bank, the credit card issuer, the merchants, the shareholders... everyone who directly or indirectly loses when someone defaults.

The reality is that debt can pass from one generation to another -- or to another person in the same generation -- the same as assets. How's that? Well, consider the obvious. If a credit card is jointly owned, then it doesn't matter when one of the cardholders dies. The other person is responsible in full for the outstanding balance, even if he or she never personally made any of those charges. This is why people should think carefully about opening joint accounts.

Authorized users, unlike a joint owner, don't have any legal responsibility to pay off the debt of a primary cardholder. Nor -- technically speaking -- do relatives who have no relationship with the credit card account.

But that doesn't mean they won't have to (indirectly) pay the debt. When people die, their debts became the responsibility of their estates. Some installment loans and credit card accounts may be covered by credit life insurance, which pays off the account balance in the event of the death. If not, the executor of the estate is supposed to pay off those bills before honoring bequests to family members and friends.

If there are little or no assets in an estate, creditors will have to take a loss on some accounts. Otherwise -- if there are cars, real estate, stocks, bonds, life insurance, cash, stacks of silver coins wrapped in tin foil and stashed in the deceased's basement freezer... then the bills should be paid.

The estate is responsible, not the poor widow or widower, as Credit Card Assist tries to claim. When a widow is also the executor or the sole beneficiary, then she may indirectly end up paying bills that technically she doesn't owe. But you have to differentiate between a bank asking for payment from an estate -- or asking for someone who is not responsible for a debt to pay.

So here's what you do if someone you love dies: Before you opt for that super-high-end casket with all the extra padding that won't make a bit of difference to the person who has passed away, do a quick financial inventory. If the deceased had debts, buy a less expensive casket -- and make sure those outstanding bills are paid.

Hazelton claims "legislation is required" to prevent creditors from harassing survivors after someone dies. But we already have Fair Debt Collection laws on the books. Maybe what we need is a law that makes it illegal for families with the financial means to act like deadbeats.

All of this brings us, in a roundabout way, to our latest Investor Uprising Quick Poll. What's the first thing you would do with the money if you won the lottery or received an inheritance of $1 million? Cast your vote here.